Texas review of big banks could further shrink muni underwriter ranks

With a huge airport bond deal potentially on the horizon, Houston Controller Chris Brown is concerned about bringing the debt to the market in the wake of a crackdown by Texas Attorney General Ken Paxton on compliance with state laws prohibiting governmental contracts with companies, including investment banks, that “boycott”  or “discriminate” against the  fossil fuel or firearm industries.

Notices from Paxton’s office over the last three weeks called on Texas municipal bond issuers and gun policies respectively, Brown said he worries more major investment banks will be banned from Texas deals at the same time Houston could be selling $2.55 billion of new money bonds for its George Bush Intercontinental Airport early next year. 

“What that potentially does is increase issuance costs as a result of decreased competition and it also potentially increases our risk,” he said, pointing to the need for banks with substantial excess net capital to handle multi-billion-dollar muni deals and, in the case of taxable debt, have the ability to sell it to prospective overseas buyers.

When Houston this summer sold $756 million of bonds for the airport, two co-managers on the six member syndicate were banks now threatened by the attorney general.

Brown, who is term-limited from running for reelection on Tuesday, said Paxton’s move is part of the state’s ongoing attack on local control in which Houston and Harris County are often the targets. He also sees the irony of the fossil fuel boycott law possibly harming Houston. 

“We’re the energy capital of the world,” he said. “We support investing in energy.”

Likewise, JP Morgan Chase says it is among the world’s largest financiers of fossil fuels, as well as cleaner energy sources.

“JPMorgan Chase makes independent business decisions consistent with the law and based on what will advance the long-term interests of the people we serve — not a political agenda,” said Lauren Blair Bianchi, a bank spokesperson. “These misguided policies seek to achieve the opposite at the expense of taxpayers.” 

Other big banks under review by Paxton’s office declined to comment. RBC Capital Markets pointed to its standing letter on file certifying its compliance with the law. 

Dru Stevenson, a law professor at South Texas College of Law Houston, said municipal officials in Texas are likely to follow “a path of least resistance.” 

“They are going to tend to gravitate towards a bank that openly pledges that they are pro-fossil fuel,” he said. “It saves you a lot of due diligence.” 

Bloomberg News reported at least two banks were dropped from deals since the net zero review was announced Oct. 17. 

Recent larger deals out of Texas included some banks now under review. The North Texas Tollway Authority’s $577 million system revenue refunding bond priced Oct. 17 with Barclays as the senior manager with Morgan Stanley and Wells Fargo as co-managers.

A $298.4 million Texas Public Finance Authority general obligation bond that priced Oct. 25 included Morgan Stanley in the underwriting team. In addition to Morgan Stanley, Bank of America, JP Morgan, Barclays, and Wells Fargo are in the authority’s 23-member underwriter pool for the fiscal 2024-25 biennium that began Sept. 1.

Lee Deviney, the finance authority’s executive director, and Horatio Porter, the tollway’s chief financial officer, declined to comment ahead of the closing of their deals. 

In an effort to quell issuers concerns, Paxton’s office, which is tasked with determining if state and local bond deals comply with law, advised bond attorneys on Wednesday of a Dec. 1 deadline to include new language in bond purchase agreements that puts the underwriter on the hook should it run afoul of the two laws that took effect in September 2021. 

“If a company is determined to be a boycotter or discriminator after the issuer has entered into the contract, the issuer can proceed to close on its bonds because the contract makes clear that the statutory representations and covenants survive termination, and the company is therefore liable for violating them,” according to the advisory from Leslie Brock, who heads the attorney general’s public finance division. 

It added banks have a Dec. 1 deadline to submit revised standing letters of compliance with the laws that omit language qualifying in some way an underwriter’s verification. 

“On the whole, this is going to be worse for underwriters,” a legal source said. “Some of them may be unwilling to enter into bond purchase agreements due to these requirements.” 

A pullback could be costly for issuers as Texas voters decide on $26.17 billion of bonds for schools, hospitals, roads, and other local projects in Tuesday’s election.